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legislation in the framework of Treasury's areas of concern as I have just outlined them.
First, in terms of general economic policy, the Treasury takes a dim view of price-maintenance or price-fixing arrangements in any sector of the economy. Liner conferences clearly represent an effort to place a floor under ocean shipping rates. Sections 16 and 18(b) of the Shipping Act of 1916 prohibit common carriers by water in our ocean trades from allowing any person to obtain transportation or related services for property at less than the published rates in their tariffs on file with the Federal Maritime Commission. These tariffs are in turn specifically agreed upon by the liner conferences. The liner conference arrangement represents an exception to the general prohibition against pricefixing schemes contained in the Sherman Anti-Trust Act as interpreted by the courts.
We do not claim to be experts on maritime affairs, but we believe that the national economic interest is best served when the market system is allowed to operate with as few constraints as possible. Attempts to reduce or restrict competition inevitably lower national welfare in the aggregate and contribute to wasteful inefficiencies in our economy.
We are familiar, Mr. Chairman, with the arguments that transportation is a unique sector, a quasi-governmental service that needs special protection or regulation by the government. However, the Treasury is not convinced of the merits of this argument. Evidence is beginning to show that regulated industries are less efficient than they would be otherwise. Businessmen, economists, and government leaders alike are increasingly advocating that we experiment with expanded competition and less regulation in transportation.
As economists, we are not surprised that illegal rebates, in effect a black market for shipping, have sprung up in response to liner conference agreements, which often result in higher prices than the market will support. If prices are artificially high, someone will try to undercut them, either through legal or illegal actions. This is not an apology for rebates, but an attempt to explain why they occur.
Mr. Chairman, let me hasten to add that I realize these hearings are not designed to consider whether or not we should abolish liner conferences, but in fact how the government can strengthen them. But the Treasury Department thinks it important to point out that liner conferences are in fact a sanctioned cartel and therefore probably impose additional economic costs on the Nation. More effective enforcement of conference agreements would perhaps even increase these costs. We believe this consideration has a bearing on the legislation before your Subcommittee.
I would now like to turn to specifics involving enforcement of the legislation under consideration. The language of the bill leaves unclear whether an offending vessel is to be physically denied entry into a port by the Coast Guard, or whether its offloading would be prohibited by the Customs Service.
Assuming that enforcement is assigned to the Customs Service, we do not anticipate that unusual enforcement problems would result from the proposal to close our ports to specific vessels whose owners refuse to cooperate with Federal Maritime Commssion investigations. From a policy point of view, however, we are concerned about the possible repercussions of such draconian actions on our international trade. Summarily closing our ports to foreign liners could result in retaliation against U.S. flag liners. We do not believe such actions would further the interests of the United States or its trading partners. Therefore, we concur with the Department of State's recommendation that concerned agencies should attempt to work with the Congress to devise alternative procedures to facilitate foreign compliance with the FMC's requirements for information. Finally, we note that the legislation could produce the result of closing U.S. ports to U.S. flag vessels, thereby creating the anomaly of "stateless" vessels.
The proposed bill also has an impact on enforcement of tax laws by the Internal Revenue Service. Three tax aspects of the bill are of concern to the Treasury.
First, Section 3(d) (1) of the bill would confer immunity from criminal prosecution under the laws of the United States arising from any illegal rebate voluntarily disclosed to the Federal Maritime Commission within one year of the bill's date of enactment. As we interpret this provision, Mr. Chairman, it is intended to confer immunity for violations of any federal law, including tax or foreign currency movement reporting laws, related to or arising from rebate violations under the Shipping Act. We believe complete immunity is far too broad. We support the Justice Department in favoring a more limited grant of immunity and are consulting with Justice on appropriate statutory language to accomplish that end.
1 See for example, U.S. Department of Justice, The Regulated Ocean Shipping Industry, January 1977, pp. 230-236.
Second, we would want to assure that, even if persons giving or receiving illegal rebates were granted immunity from prosecution under the Shipping Act, they would have to pay any taxes and related civil penalties otherwise due. The recipient of a rebate must declare it as income or reflect the amount of the rebate in a lower cost under Section 61 of the Internal Revenue Code. Any person failing to report a rebate as income or failing to reduce costs commensurately is liable for payment of taxes due. Similarly, the payer of a rebate may not deduct the payment as an ordinary and necessary business expense or list it as a cost that reduces its gross receipts (under Section 162(C) (2) of the Code) if such payment subjects the payer to criminal penalties or the loss of a license or privilege to do business. Since Section 16 of the Shipping Act provides that person paying illegal rebates may be charged with a misdemeanor and fined, and since the proposed bill would authorize the suspension of the right of liners to use U.S. ports, payment of a rebate will not be allowed as a deductible expense of the liner or a cost that reduces its gross receipts. If a liner violated these provisions, the IRS should be able to collect any taxes and penalties due.
Third, we want to remind the Committee that Section 6103 of the Internal Revenue Code imposes statutory limitations on the Internal Revenue Service's ability to assist the Federal Maritime Commission in ferreting out illegal rebates. Under that provision, an IRS auditor who discovers an illegal rebate through studying a tax return or the taxpayer's books and records cannot report that information to the FMC. With an ex parte court order, however, the FMC would be able to obtain such information for nontax criminal purposes. On the other hand, the IRS could report to the FMC information bearing on the violation of a criminal statute learned by an auditor from third parties in the course of investigating a taxpayer. Further, the FMC could request third party information from the Internal Revenue Service bearing on a criminal investigation.
As you know, the Shipping Act of 1916 provides that civil penalties may be imposed. The bill under consideration also proposes civil sanctions. This feature limits the extent of feasible cooperation between the IRS and the FMC under established-and I would add, well thought out-procedures. If these procedures do not seem reasonable, Mr. Chairman, you may want to consider additional legislation. However, as a general policy matter, the Treasury does not favor the use of tax investigations or tax return information to advance the prosecution of non-tax offenses.
Mr. ZEFERETTI. Our first witness this morning is the Honorable Robert J. Blackwell, Assistant Secretary for Maritime Affairs, Department of Commerce.
Mr. Blackwell, you may proceed.
STATEMENT OF HON. ROBERT J. BLACKWELL, ASSISTANT SECRE
TARY OF COMMERCE FOR MARITIME AFFAIRS, MARITIME ADMINISTRATION, DEPARTMENT OF COMMERCE
Mr. BLACKWELL. Thank you, Mr. Chairman, and members of the committee. My statement is rather short.
I appreciate the opportunity to present the views of the Maritime Administration and the Department of Commerce with respect to H.R. 9518.
The bill would amend the Shipping Act, 1916, to provide that whenever the Federal Maritime Commission receives a complaint of a violation of section 16_except paragraphs 1 and 3—of that act, which prohibits obtaining transportation on a common carrier by water to foreign commerce or in the noncontinguous domestic trade at less than the regular rates or charges established, or of section 18(b) of that act, which relates to the filing of tariffs by common carriers by water in foreign commerce, the Commission shall investigate whether such violation has occurred unless it deems the complaint to be unsubstantial. The Commission may also, on its own motion, investigate whether any person has violated these sections. If any respondent carrier in such proceeding fails to answer a question in a deposition, or written interrogatories, or discovery procedure, or fails to comply with a subpena, the amendment would require the Commission to suspend the carrier's tariffs filed under section 18 and the vessels of the respondent carrier would be denied entry to U.S. ports until the carrier has fully responded. If the respondent carrier engages in the foreign commerce of the United States after its tariff has been suspended—except to complete a voyage—it would be subject to a civil penalty of not less than $25,000 and not more than $50,000 for each day such service continues.
The bill would further amend the Shipping Act, 1916, to provide that no penalty shall be imposed on any person under section 16other than paragraphs 1 and 3—who is engaged in foreign commerce or under section 18(b) for any act that occurred before enactment of the bill, if within 1 year after enactment of the bill the person who committed the act makes a good faith disclosure thereof to the Commission. The Commission, however, would be required to issue a cease and desist order and upon violation of that order penalties for the prior violation of these sections would be imposed, and a civil penalty of not less than $25,000, nor more than $50,000 for each such violation of the cease and desist order would be imposed.
The amendments made by the bill would expire 3 years after their enactment.
We defer to other agencies with respect to the overall application of the bill.
However, as far as our responsibility with respect to U.S.-flag subsidized operators is concerned, we do not favor the amnesty or immunity provisions and in our view if Congress decides to pass this legislation, its provisions should be prospective only and those penalties, criminal or civil, which now exist should be imposed for current or past violations of the Shipping Act, 1916. Furthermore, we would caution that, whatever remedies Congress selects for enforcement of the act, they should be imposed uniformly against all common carriers by water, whether U.S. or foreign flag.
In conclusion, we do not urge that this legislation be used to immunize U.S.-flag subsidized operators from the mandates of the Shipping Act, 1916, or that they in any way be afforded a 1-year grace period. Whether this can be accomplished for all carriers, U.S.and foreign-flag, by way of mitigation, or other discretion in enforcement, under the existing provisions of the act, we are not in a position to discuss. In the event a decision is made to prosecute or if you hay
or penalize violators in anyway, no special status should be afforded
Mr. Blackwell, the Maritime Administration has the responsibility for direct promotion of the American Merchant Marine. The purpose of operating subsidy is to permit U.S.-flag vessels to operate in international trade at competitive rates.
Is that a correct statement?
Mr. ZEFERETTI. And if foreign-flag competitors of U.S.-flag carriers are rebating, doesn't that distort fair-rate competition?
Mr. BLACKWELL. It certainly distorts any type of reasonable competition that should exist between competing carriers. Rebating is a malicious device. It has been determined to be a kickback. I think it should be stopped. In addition, I think it should be discouraged to the extent that the authorities now possess the tools to do so. If they do not possess the necessary tools for effectively controlling rebating, especially rebating abroad, by those foreign carriers that engage in our foreign commerce, I think the act should be strengthened to give the Maritime Commission whatever authority they need that (1) is constitutional; and (2) would not act in such a way as to clearly conflict with the sovereignty of the states of those carriers.
Mr. ZEFERETTI. How can the U.S. carriers survive if rebating is widespread among the U.S. foreign trades?
Mr. BLACKWELL. That is one of the dilemmas, Mr. Zeferetti, and one of the reasons this problem has taken such a long time to resolve.
In my opinion, no carriers should rebate. It is proscribed by U.S. law.
The fact of the matter is, however, that rebating, as you quite aptly put it, is essentially a competitive device. It is a device for attracting cargo. It is much more of a competitive device today than it was even 20 years ago. Because when our foreign fleets, both U.S. and foreign-flag fleets of conventional ships, sailed two or three decades ago, they were largely labor intensive vessels. They had a significant structure of variable costs.
Today, it is quite different on most ships, the high speed, large container ships are essentially a capital intensive operation. Most of the charges against that vessel are not in the operating cost area but in the capital cost area to meet expenses of payment of principal and interest.
Consequently, these large, fast ships have an essentially invariable break-even point and it is incumbent, for successful steamship operation, for the operator to make that break-even point. Because at that break-even point the operator has essentially met his large capital cost and a significant portion of his operating cost. After that, almost everything that that carrier captures in terms of freight revenue can be put on the profit side. So there is a competitive economic inducement to attract as much cargo as an operator can.
It costs as much or nearly as much to move an empty container of freight as a full container of freight. So any contribution that that container can make, regardless of whether the rate is reasonable or not, toward meeting the variable cost of loading that box and discharging it, it makes a contribution to the vessel and very likely as a profit if the carrier has met its break-even point. So I think this problem is even more difficult today than it was 20 years ago, because there was always a base under which a carrier would not rebate.
For instance, if there was a $75 rate on x commodity and the loading and discharging costs of that commodity were $40, you know quite well that the carrier might come down to $40 on his freight rate but would never, never go below his out of pocket, below his other costs because then he would simply be giving his own money away and they are not in the business to do that.
The problem, as you suggest in your opening statement, has also been compounded, and possibly caused, by significant amounts of overtonnaging and while I think it is incumbent upon all those interested in a healthy U.S. merchant marine as well as a thriving foreign commerce to do what they can to eliminate rebating in terms of prosecuting the current law or making it effective if necessary, I frankly believe that we are dealing only with the symptoms of the problem when we tackle rebating and not the real problem. The real problem, basically, is simply too much capacity and some of the economic factors that I have mentioned to you which provide economic inducement for carriers to engage in rebating.
Mr. ZEFERETTI. Does the Maritime Administration require any authority to act effectively to prevent overtonnaging on our trade routes ?
Mr. BLACKWELL. No. As you know, in terms of our total trade, we only have about 4-percent penetration of our total trade. The latest complete figures that I have seen for our liner trade, for 1976, which I think we just published yesterday at the Maritime Administration, show U.S.-Hag penetration in the liner area of 31 percent by weight and 32 percent by value. So we are only providing a third of the tonnage. We have no way of controlling the rest of the trade. There is no control of entry in the United States, unlike most other trades where it is done officially or by the carriers themselves operating under a general policy statement of their government.
Mr. ZEFERETTI. Ms. Mikulski?
Mr. Blackwell, first of all, I support those goals that we talked about, applying the standards to all ships. But how would you see this being enforced !
If a law is being effective, it has to be enforceable on a day-to-day basis. Would you describe how you envision that, and if you think this proposal is enforceable ?
Mr. BLACKWELL. Well, as I mentioned, I think that the current law should be strengthened. I think that the current law should be pursued with vigor by the Federal Maritime Commission, and by the Justice Department, to the extent that the Justice Department is in